Ways to Spend Money

by Eric on June 4, 2010

Every time I spend money, I try to mentally place the expense in one of five categories. Those categories are:

  • Helping myself and my family
  • Helping other people
  • Needs and material comforts
  • Memory creation (experiences)
  • Waste

Some expenses don’t categorize neatly. It’s not an air tight system. It’s just a useful way for me to think about money.

I don’t spend much effort on this. I just kind of casually consider it whenever I spend. I really only have one goal in doing this, and that is keeping the ‘Waste’ category as small as possible.

Waste

Waste is any expense that doesn’t fall under one of the other categories. The way I think about it, if I spend money and the result is not something in one of my four good categories, then I’ve wasted that money.

The whole point of this mental classification is to minimize wasteful expenditures.

Helping Myself and My Family

Helping myself and my family encompasses expenses that meet two criteria. First, it must improve my family’s condition. Second, it must compound.

If I buy an asset intended to provide us with money, that investment falls under this category. Examples are shares of stock or CDs. (The money that investment provides will compound).

If I spend money to develop some useful skill that enriches our lives, that expense falls under this category. Skills that increase earning power, make us more efficient or effective, or help us create memories qualify. (I’ll explain memory creation in a minute). Examples are learning to cook, fix cars, program computers, dance, take pictures, pick stocks, etc. (The money, efficiency, or enjoyment the new skill provides will compound).

If I spend money on something that helps me get more money, that expense falls under this category. An example is gasoline to get me to work. (The money I earn will compound).

Helping Other People

This is charity. This can be giving to organizations that help people or directly to individuals. I prefer that this money compound, but I don’t insist. One thing that I do insist is that this money be used for genuine help and not for enabling destructive behavior.

Needs and Material Comforts

Needs are food, shelter, water, clothing, healthcare – things necessary for survival. Material comforts are things like air conditioning and transportation.

This category is tricky for two reasons. First, it can be tough to distinguish between an acceptable material comfort and a wasteful extravagance. There is no clear rule. I have to be careful with these.

Second, sometimes it’s tough to know whether something belongs in this category or in the ‘Helping Myself’ category. For example, fuel to get to work belongs to ‘Helping Myself.’ I also need food and clothes to work, but I put those in ‘Needs and Material Comforts’. So what’s the difference? I don’t dwell on it. Neither of them belongs to ‘Waste’, and that’s really all I care about.

Memory Creation

Memory creation just means doing something fun that I and my family will remember fondly. Taking a family trip, going to a rodeo, or going to a concert are all examples. It just has to be fun and memorable.

An ordinary outing to the movies doesn’t count. Neither does sitting around and watching television. It has to create memories that me and my family will cherish forever.

I used to think that spending on fun, memorable experiences was wasteful. As I’ve gotten older I’ve learned better.

Don’t misunderstand me: I’m not saying creating these memories requires spending money. The memories come from doing fun activities with the people you love. There are plenty of these activities that don’t require money. But I’ve learned that money can facilitate these activities, and when it does it is money well spent.

Incidentally, if you think (like I foolishly did) that these kinds of memories aren’t valuable, I have a couple of exercises for you. First, think of your fondest memory. It can be something from childhood, high school, wedding day, whatever. Now imagine that some scientist will pay you to allow him to erase that memory from your mind. It will be as if it never happened. How much would you charge him? I bet it’s a lot.

If that doesn’t make you appreciate fond memories, try this. Go talk to an old person whose health is declining. Notice her demeanor when she talks about ordinary stuff – the news, food, the weather, etc. Then notice her demeanor when she talks about fun times with her children. How much do you think she values those memories?

Conclusion

This is not a rigorous system, and it’s certainly not all that I do to scrutinize my expenses. It doesn’t say anything about the proportions among the categories. But it does give me a framework for identifying and eliminating wasteful expenditures. Of course, that leaves more money for spending on the four good categories, which is the whole point.

I hope this will be a useful framework for you to consider your expenses.

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